Gold and silver suffer heavy losses — Is the wild rally nearing its end?
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Gold and silver experienced a historic plunge on Tuesday, "ashare trading" spurred a sharp rise in USD/JPY, and U.S. stocks closed mixed.
Spot gold plummeted 5.3% in a single day, briefly breaking below $4,100 during trading, and eventually closed at $4,124, marking the largest single-day percentage decline since August 11, 2020. However, as the current gold price has doubled compared to five years ago, Tuesday's intra-day pullback of nearly $250 was more than twice as large as back then.
Apart from gold, other precious metals that had been performing well recently all suffered a setback on Tuesday. Silver dropped more than 7% overnight, while palladium and platinum fell by 5.8% and 6.3% respectively.
Is this a correction of the recent frenzy (profit-taking), or a signal of a medium-term adjustment?
Gold’s volatility indicator ATR (Average True Range) broke above $100. With U.S. CPI data to be released this Friday and the forces of bulls and bears currently more balanced, gold may continue to remain highly volatile for the rest of the week.
However, it should be noted that historical data shows once the ATR falls back from its peak, gold’s frenzied rally tends to gradually come to an end and turns into consolidation or a downtrend. For example, the last time ATR peaked was in April this year, after which gold entered a sideways phase from May to August.
Another indicator suggesting a possible phase adjustment for gold is the ratio of gold price to US money supply (M2). This ratio has reached its highest level since 2011, which means that compared to the excessive issuance of US currency and ample market liquidity, gold is no longer undervalued.
Meanwhile, when comparing the almost $30 trillion gold market to the nearly $4 trillion virtual currency market, it can be seen that the latter is catching up rapidly. As the global political and economic landscape shifts, competition between traditional safe-haven assets and emerging assets may become increasingly apparent. Increasing allocation to virtual currencies means a certain reduction in allocations to other assets.
Although the release of extreme short-term optimism led to a sharp drop in precious metal prices, whether gold will undergo a medium-term adjustment remains to be seen; the weekly close pattern may provide more clues. However, under expectations of central bank rate cuts (weakening USD) and investment/reserve diversification (de-dollarization), the medium- to long-term trend for gold is still regarded optimistically by the market.
In other markets, despite optimistic earnings from GM and Coca-Cola, the US stock market's response was moderate. The Dow Jones closed slightly higher while the Nasdaq ended slightly lower. After Sanae Takaichi was elected Prime Minister of Japan, the Nikkei continued to hit record highs. USD/JPY rose 0.78% overnight and hit a weekly high near the 152 level. The yen’s depreciation indirectly spurred a rebound in the US Dollar Index, while other non-US currencies generally closed lower.
On the news front: There is uncertainty regarding meetings between US-Russian and US-Chinese leaders, and there has been no progress towards averting a US government shutdown.
XAUUSD 4-hour
Source: TradingView
Gold once probed the $4,000 mark in early Wednesday trading, then rebounded nearly $100.
For bulls, it's important to observe whether the price closes a bullish 4-hour candlestick with a long lower shadow, which would signal a potential for continued rebound. Watch the $4,144 level as well as the $4,190–4,200 area; a decisive breakout above the latter would restore confidence among bulls.
However, under the influence of the double-top structure and bearish daily patterns, even if a rebound continues, it may still face significant pressure and be limited in magnitude and strength. If the decline continues, watch for key support from the uptrend line from August–October and the 20-day moving average in the $4,000/20 region, which will be the last line of defense for bulls.
Gold’s overnight and one-week implied volatility stand at 45% and 33% respectively, so high volatility may persist.
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